RE KENLY (HK) LTD.

HCCW 964/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 964 OF 2002

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D E C I S I O N

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The application

1. This is an application taken out by the opposing contributory, Ken Holdings Berhad ("KHB") under Order 18 rule 19 of the Rules of the High Court to strike out certain parts of the Amended Petition to wind up Kenly (HK) Limited ("the Company") on just and equitable grounds and to seek relief based on unfair prejudice to the minority under section 168A of the Companies Ordinance, Cap. 32. The parts sought to be struck out and the grounds for striking out are as follows:

(1) paragraphs 85 and 88 of the Amended Petition and paragraph (1) of the prayer to the Amended Petition be struck out on the grounds that

(a) the petition discloses no reasonable cause for a winding-up order or is otherwise an abuse of the process of the court;

(b) further or alternatively, the petitioners are acting unreasonably in seeking to have the Company wound up instead of pursuing the other remedies available to them;

(2) the name of the 2nd petitioner, Cheng Leung Yan Brian ("Brian Cheng"), and all allegations made by or relating to him, in so far as they relate to his application for an order under section 168A, be struck out on the ground that, at the time the petition was presented, he was not a member of the Company.

The Company and the shareholdings

2. The petition was presented on 21 August 2002 by KHL Projects Limited ("KHL Projects") as the 1st petitioner and Brian Cheng as the 2nd petitioner. Although an order was sought in the petition for KHB to buy out the shares of the petitioners in the Company, KHB was not named as a respondent in the petition. Two of the directors, Tan Boon Kang Kenny ("Kenny Tan") and Tang Kam Chee ("KC Tang") were named as the 1st and 2nd respondents and the Company was named as the 3rd respondent. I understand an application will be taken out by the petitioners to amend the petition to join as co-respondents KHB and three other parties that are registered as shareholders.

3. For the purpose of this application, I will assume as true and correct the background matters of the Company as set out in the petition and in the petitioners' evidence.

4. The Company was incorporated on 23 March 1993 under the laws of Hong Kong as a private company. The shares were held as to one-third by each of three individuals, Brian Cheng, Kenny Tan and Tang Kwong Chung Bosco ("Bosco Tang") and they were the only directors. Kenny Tan was and is at all times based in Malaysia.

5. In 1995, Bosco Tang left the Company and decided to sell his shares. As a result, there was a restructuring and the shareholdings were altered as follows:

6. Brian Cheng was the beneficial owner of the majority of the shares in B & G. KHB is a company listed on the Second Board of the Kuala Lumpur Stock Exchange and Kenny Tan was and is its managing director. After the restructuring, it was agreed between Brian Cheng and Kenny Tan that Brian Cheng would be the managing director responsible for business and project management, that Kenny Tan would be responsible for reviewing and advising the financing and accounting aspects of the Company, and that the Company's main activity would be a specialist contractor engaging in civil engineering projects, pipe jacking and site formation work.

7. In 1998, it was proposed by Kenny Tan that the business of the Company should be expanded to landslip preventive measure ("LPM") and that there should be a merger between the Company and KHL Projects, the 1st petitioner herein. KHL Projects was incorporated in Hong Kong in 1992 and is owned as to 75% by Brian Cheng and 25% by Lau Chung Ho Rocco ("Rocco Lau"). KHL Projects was involved in site formation as a sub-contractor. The Company went through another restructuring and its shareholdings were changed as follows:

8. It is to be noted that the division of 51% shareholding of the Malaysian shareholder and 49% shareholding of the Hong Kong shareholders was maintained. It is the case of the petitioners that an agreement was reached at the time of the merger that this was to achieve the following effect, namely, that KHB is to provide the Company with accounting advice and "sufficient financial backup" for its projects and that KHL Projects is to provide to the Company all resources, technical backup and network connection.

9. On 28 April 2001, an additional 700,000 shares were issued by way of bonus issue and the shareholding structure became as follows:

10. Again, the 51% and 49% division between Malaysian and Hong Kong interests was maintained in the issuing of additional shares.

11. In August 2001, at a meeting of the board of directors of the Company, Brian Cheng and Rocco Lau informed the board of their decision to resign from their respective positions as managing director and senior projects manager. It was agreed that their resignation would take effect from 31 December 2001 and Brian Cheng and Rocco Lau would hand over all their work on the effective date and they did resign as agreed, although Brian Cheng remained as a director. As the petitioners are not seeking to found a case for relief in winding up or section 168A on the ground of exclusion from management, it is not necessary to dwell on the reason for the resignation, except to say that the relationship between the two camps had become strained.

Negotiations to sell the shares of KHL Projects

12. From March to July 2002, there were discussions between Brian Cheng (conducted mainly through Rocco Lau) and Kenny Tan for the sale of the shares of KHL Projects in the Company to Kenny Tan and KC Tang. The discussions broke down because the parties had failed to reach agreement on the true value of the shares. There are no provisions in the articles of association on the valuation of shares in the event of a disposition of the shares in the Company.

13. According to the audited accounts for the year ended 31 December 2001, which were approved by the board of directors on 1 March 2002, the net asset value of the Company was HK$11,509,059.00. Brian Cheng and Rocco Lau contended that there was substantial over provision for future projected costs and doubtful debts in the audited accounts. After suitable adjustment for these over provisions, the true and fair value of the Company would be arrived at as follows:

14. Thus, on the basis that the true and fair value of the Company should be about HK$38 million, the 40% shareholding of KHL Projects would have cost about HK$15.2 million. Letters were exchanged between the parties on this in July 2002. In his letter to Rocco Lau dated 18 July 2002, Kenny Tan alleged that Rocco Lau had initially proposed a bottom line of HK$3.1 million for the sale of the shares of KHL Projects. When this was turned down by Kenny Tan, Rocco Lau reduced it to HK$2.5 million and this lower price was still unacceptable to Kenny Tan. In June 2002, Rocco Lau had proposed to reduce the price further to HK$2 million. Kenny Tan expressed surprise in his letter that Rocco Lau had greatly increased the asking price and stated there was no purpose to re-consider the true and fair value of the Company as put forward, so KHL Projects might as well retain its shareholding in the Company.

15. Against the background of the negotiations to sell the shares of KHL Projects, the petitioners allege that a scheme was devised by those in control of the majority shareholder to depress the value of the shares by putting forward misleading and inaccurate accounts, to dilute the shareholdings of the petitioners in the Company, and to misappropriate the 9% shareholding of Brian Cheng in the Company.

Alleged misappropriation of shares

16. In the register of members of the Company, it was recorded that on 18 May 2002, Brian Cheng has ceased to be a member in that all his 90,000 shares were on that date transferred by him to Alliance Investment Holdings Limited ("Alliance"). Further it was recorded that on 22 May 2002, Alliance has ceased to be a member in respect of 10,000 of its shares in that Alliance had on that date transferred the same to Leong Vai Kuan ("Leong"), who is a director of Alliance. Alliance was incorporated on 4 April 2002 with a paid up share capital of HK$2.00 and its two directors are Leong and his wife. Its registered office is the same as that of the Company. The transfer of Brian Cheng's shares was effected by two instruments of transfer, which were not witnessed, and two bought and sold notes at par value, all purportedly executed by him as the transferor.

17. It is the case of the petitioners that the signatures of Brian Cheng on these documents were forged. In support of this, he has obtained an opinion from a handwriting expert on 25 November 2002. It is pleaded in the petition that at a meeting of the directors on 24 June 2002, Kenny Tan had informed Rocco Lau that Brian Cheng's 9% shareholding would be transferred to someone else. When Brian Cheng learned about this, he wrote to the Company on 29 June 2002 alleging that this was an infringement of his proprietary rights as a registered shareholder because he had not transferred any of his shares to any one from 17 May 2002 onwards. He also asked for the documentary evidence showing the alleged transfer of shares. He followed up with another letter to the Company on 16 July 2002 when no reply was received.

18. On 23 July 2002, KC Tang replied on behalf of the Company stating that the transfer of the 9% shareholding of Brian Cheng was approved by the board, after having received written request for the transfer of the shares and that 80,000 of the shares have since been registered in the name of Alliance and the other 10,000 shares in the name of Leong. No documentary evidence was provided to Brian Cheng as requested.

19. Brian Cheng wrote to the Company on the same day repeating his surprise and protest of the transfer of his shares and stating that in view of the action which had infringed his proprietary right as a shareholder, he would file a winding-up petition against the Company.

Alleged dilution of shares

20. On 31 May 2002, the board of directors passed a resolution for a rights issue of 2,500,000 shares at par value and issued the call on the rights issue on 31 July 2002. KHL Projects did not subscribe to the rights issue. As a result, on 15 August 2002 1,500,000 shares were allotted to the following shareholders who have subscribed: 1,275,000 shares to KHB, 200,000 shares to Alliance, and 25,000 shares to Leong.

21. On 21 August 2002, the board of directors approved the allotment of the 1,000,000 shares not taken up by KHL Projects in the rights issue to Alliance and the transfer by KHB of 510,000 of its shares to its wholly owned subsidiary, Support Capital Sdn Bhd ("Support Capital"). On 8 October 2002, the transfer of 510,000 shares to Support Capital was effected and on 16 October 2002 1,000,000 shares were allotted to Alliance.

22. Thus, the present shareholding structure is as follows:

23. As a result of the rights issue, which was not taken up by KHL Projects, its shareholding in the Company is reduced from 40% to 11.4%.

24. Brian Cheng had objected to the rights issue and an advance of HK$2.5 million proposed to be raised from the shareholders proportionate to their shareholdings when he received notice of the directors' meeting to be held on 31 May 2002 to consider the same. It is the case of the petitioners that the rights issue was devised with the ulterior motive to dilute the shareholdings of the petitioners as the respondents knew or should have known that the petitioners were not able to raise sufficient funds for the rights issue, in that the Company is indebted to the petitioners and has not repaid the sums owed to the petitioners. It is alleged that the basis of the allotment was a sham as there was no justifiable reason for the rights issue. Further, this was in breach of the agreement or understanding at the time of the merger and restructuring in 1998 that KHB is to provide financial support for the projects of the Company.

25. The respondents have denied this allegation and asserted that the rights issue was to raise capital to satisfy the financial requirements of the Works Bureau of the Hong Kong Government in relation to the Company's application to be included in the list of approved suppliers of materials and specialist contractors for public works under the "Landslip Preventive/Remedial Works to Slopes/Retaining Walls" (an "LPM licence"). The Company had applied for an LPM licence in 1999 and 2000 and was not successful, as a result it could only act as a sub-contractor for LPM work. After fulfilling the technical requirements in 2001, the Company renewed its application and was informed by the Works Bureau by a letter dated 11 April 2002 that its shortfall in "working capital" was assessed at HK$22,979,000.00 on the audited accounts for the year ended 31 December 2001 and this must be rectified to satisfy the financial requirements in the application for an LPM licence. Further, by a letter of the Works Bureau dated 18 October 2002, the Company was informed that after taking into account its increase in capital of HK$1.5 million (this was after 1,500,000 shares were allotted to KHB, Alliance and Leong in the rights issue in August 2002), the Company still had a shortfall in "employed capital" of HK$1 million (as KHL Projects did not subscribe to the rights issue). Eventually, after measures were adopted by the Company to reduce its working capital shortfall and to increase its employed capital, an LPM licence was granted to the Company on probation on 1 November 2002.

Alleged misrepresentation in the audited accounts

26. The petitioners allege that it was because the audited accounts for the year ended 31 December 2001 do not reflect the true financial position of the Company that brought about the working capital shortfall, which had to be reduced to meet the financial requirements for an LPM licence. The misrepresentation in the audited accounts was devised to depress the value of the shares in the negotiation for the sale of the shares of KHL Projects.

27. The audited accounts were approved by the directors on 1 March 2002 but Brian Cheng did not attend that meeting in Malaysia. Rocco Lau was sent to attend the meeting as the alternate director for Brian Cheng but he was not admitted to the meeting. Brian Cheng received a copy of the audited accounts on 10 May 2002. Thereafter Brian Cheng and Rocco Lau wrote to the Company and its auditor querying various matters in the audited accounts, in particular the provision for future projected costs of HK$25 million notwithstanding the projects were fully completed or near completion and the provision for doubtful debts. The auditor replied stating that the provision for future projected costs and for doubtful debts was approved by the directors and that the audit was performed in accordance with the guidelines of the Hong Kong Society of Accountants.

28. On 22 July 2002, Brian Cheng wrote to the Company protesting of misrepresentations made by Kenny Tan and KC Tang regarding the status of the LPM licence as recorded in the minutes of the board meeting of 31 May 2002 and inaccuracies in the audited accounts. He stated that if the complaints were not rectified, he would take action to protect his interest including presenting a petition to wind up the Company.

The grounds for relief sought by the petitioners

29. On the basis of the matters complained of that the audited accounts were misleading and inaccurate, there was dilution of the shareholdings of the petitioners with the ulterior motive of depressing the price of their shares, and there was misappropriation of the shares of Brian Cheng, the petitioners claim relief for winding-up of the Company and for relief under section 168A that their shares be purchased by KHB, Kenny Tan and/or KC Tang at a fair valuation. Further, a declaration is sought that the transfer of Brian Cheng's shares to Alliance and Leong be declared null and void.

30. By reason of the matters complained of, it is alleged inter alia that the conduct of the management constituted breaches of fiduciary duties owed by the directors to the Company; that the rights issue and the advances procured from the shareholders were in breach of the agreement or understanding in 1998 that KHB is to provide financial support to the projects of the Company; that the rights issue was oppressive and unfairly prejudicial to the minority shareholders; and that the petitioners have lost all trust and confidence in the management.

Solvency of the Company

31. As mentioned earlier, according to the audited accounts of the Company for the year ended 31 December 2001, the net assets were HK$11,509,059.00 and profits after tax were HK$8,029,630.00. The management accounts made up to 31 July 2002 showed net assets of HK$11,735,949.00 and profits after tax of HK$226,890.00 for the seven-month period. I am not told the reason for the substantial drop in profits in the first seven months in 2002, before the petition was presented. It is not in dispute that the Company is solvent.

32. On 30 October 2002, Deputy Judge Barma, SC made a validation order for payments to be made into or out of the bank accounts of the Company for paying debts incurred in the ordinary course of business, subject to reporting conditions to be observed by the Company.

33. On 3 September 2002, which was after the presentation of the petition, Maybank granted overdraft facilities to the Company to the extent of HK$3.5 million as working capital, to enable the Company to meet the financial criteria for an LPM licence to maintain minimum levels of employed and working capital at HK$3.5 million. It is provided in the facility letter that Maybank may cancel banking facilities provided to the Company in the event that "legal proceedings, suit or action of any kind is instituted against [the Company]" as this would constitute an event of default and that the Company is obliged to inform Maybank of any occurrence of an event of default. Notwithstanding the presentation and advertisement of the petition, it would appear that Maybank has not taken any action in this regard.

The locus of the 2nd petitioner

34. I propose to deal with the locus of the 2nd petitioner to the reliefs sought first, this being the second part of the striking out application.

35. The striking out application only relates to the locus of Brian Cheng to seek relief under section 168A. It is recognised by the opposing contributory, KHB, that Brian Cheng does have locus to petition to wind up the Company under section 177(1)(f) by virtue of section 179(1) which provides as follows:

"An application to the court for the winding up of a company shall be by petition, presented subject to the provisions of this section either by the company, or by any creditor or creditors ..., contributory or contributories ... or by all or any of those parties, together or separately:

Provided that -

(a) a contributory shall not be entitled to present a winding-up petition unless -

...

(ii) the shares in respect of which he is a contributory, or some of them, either were originally allotted to him or have been held by him, and registered in his name, for at least 6 months during the 18 months before the commencement of the winding up ..."

36. There is no dispute that the 90,000 shares originally registered in Brian Cheng's name were held by him and registered in his name for at least six months during the 18 months prior to 21 August 2002.

37. In contrast, the locus to seek relief under section 168A is different. Section 168A(1) provides as follows:

"Any member of a company who complains that the affairs of the company are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members (including himself) ... may make an application to the court by petition for an order under this section."

38. Thus, for relief to be sought under section 168A, the petitioner must be a member of the company. Section 28(2) provides as follows:

"Every other person who agrees to become a member of a company, and whose name is entered in its register of members, shall be a member of the company."

39. If Brian Cheng had indeed executed the instruments of transfer and the sold notes in respect of all his shares, he would have ceased to be a member of the Company at the time the petition was presented and would have no locus to seek relief under section 168A.

40. There is however a serious dispute whether the signatures of Brian Cheng were forged. It is recognised by KHB that this dispute cannot be resolved on the existing evidence. I understand the petitioners will join Alliance and Leong as respondents in these proceedings. As mentioned earlier, one of the reliefs sought in the petition is that the transfer of Brian Cheng's shares to Alliance and Leong be declared null and void. If the court should make a consequential order that the register of members be rectified under section 100, the order may be retrospective in that the court can declare that a person was or was not a member as from a particular date. Until the dispute of the alleged forgeries is resolved, it would not be appropriate to strike out Brian Cheng as the 2nd petitioner in relation to his petition to seek relief under section 168A for lack of locus.

41. As to whether this dispute should be tried separately in other proceedings before the petition is to be proceeded with, this is but a rule of practice not a rule of law. In exercising its discretion, the court would consider all circumstances in determining whether to require the petitioner to establish his locus first and have the dispute regarding his locus determined outside the petition (Cheung Donald Quintin v. Fester Corp. Ltd [1987] 3 HKC 270; Alipour v. Ary [1997] 1 WLR 534). It must be borne in mind that the allegation of misappropriation of Brian Cheng's shares is one of the principal complaints to found relief in section 168A and to wind up the Company, so it is appropriate that the issue should be determined in the context of the petition (cf. Re a Company, ex parte S-P [1989] BCLC 579). It does not appear to me there is any procedural or practical advantage to be gained in resolving the dispute on the locus to seek relief under section 168A first, in isolation to the other allegations made against the respondents. There is no challenge here that Brian Cheng does have locus to petition to wind up the Company.

42. For the above reasons, I dismiss the second part of the application, which is to strike out the name of the 2nd petitioner and all allegations made by or relating to him in so far as they relate to his petition for relief under section 168A.

If petition discloses reasonable cause of action or is otherwise an abuse of process

43. As I have summarised above, the petitioners rely on the same factual allegations to found relief under section 168A and for a winding-up order. It is not the contention of Miss Linda Chan, who appeared for KHB, that in so far as the relief under section 168A is concerned, the petition discloses no reasonable cause of action or is otherwise an abuse of the process of the court. It is however contended by KHB that in so far as the petition for winding-up on just and equitable ground is concerned, the petition is bound to fail because, among other things, the circumstances are not serious enough to justify this remedy.

44. It is not necessary for me to deal with each and every point taken by Miss Chan in her submissions that the petition discloses no reasonable cause of action for a winding-up order or is otherwise an abuse of the process of the court, for instance, the submission that there is nothing in the relationship between the petitioners and KHB, which is a publicly listed company in Malaysia, that could be relied on for the superimposition of the equitable considerations in Ebrahimi v. Westbourne Galleries Ltd [1973] AC 360 at 379. If I am satisfied that in respect of some of the complaints alleged, it is not plain and obvious that the petition for winding-up is bound to fail, it would not be right to strike out the petition for winding-up on this ground. I do not accept Miss Chan's submission that even if the matters complained of were established, it is plain and obvious that the totality of the improprieties alleged are not sufficiently grave to justify a winding-up order on the ground of total loss of confidence in the conduct and management of the affairs of the Company.

45. The real attack on the petition for winding-up, as I see it, is not so much that it discloses no reasonable cause of action. Plainly, in respect of the alleged scheme to depress the value of the shares to be sold by presenting inaccurate and misleading accounts, by diluting the shareholding of KHL Projects, and by misappropriating the shares of Brian Cheng, these allegations do disclose a cause of action for a winding-up order. What is really alleged is that the petition is an abuse of the process of the court, in that facts which are not disputed or not capable of being disputed would show that these allegations cannot succeed and the petition is bound to fail. With that, I turn to the allegations surrounding the rights issue.

46. It was submitted by Miss Chan that on an objective assessment of the situation, this would show that the substantial or primary purpose of the rights issue was not to dilute the shareholdings of the petitioners, which came about because KHL Projects did not subscribe to the shares allotted to it under the rights issue, but rather it was a decision taken bona fide in the best interest of the Company. I was taken to the letters mentioned earlier and other correspondence exchanged between the Company and the Works Bureau regarding the requirements of working capital and employed capital that must be fulfilled for an LPM licence to be issued. According to the financial criteria published by the Works Bureau for an LPM licence, the minimum employed capital is HK$3.5 million and the minimum working capital is HK$3.5 million. It was also provided in the financial criteria that a shortfall in the employed capital can be rectified by an increase in share capital, while a shortfall in working capital can be rectified by an increase in share capital to be paid up in cash, or arrangement of a bank loan that is not repayable within 12 months, or by a deferment in repayment of outstanding loan to directors or related companies.

47. A number of allegations were made by the petitioners to counter this and to support their contention that the exercise of the rights issue was a sham. I do not propose to mention each of them except to point out the salient ones.

48. Firstly, it was alleged that the rights issue was premature and the decision was not taken in good faith. The petitioners pointed to the letters written by Brian Cheng to the Company on 22 and 25 July 2002 in which it was alleged that Kenny Tan and KC Tang had failed to disclose to the Works Bureau in the application for the LPM licence that there were material and substantial changes in the personnel of the Company and to update the records relating to this to enable the Works Bureau to re-assess the application taking into account such changes. Such non-disclosure, it was alleged, amounted to a misrepresentation to the Works Bureau and would result in actions being taken to penalise the Company. Brian Cheng requested the management to make a full disclosure to the Works Bureau of the changes in personnel without delay and objected to the proposed increase in share capital as premature, as it was unclear how the Company's application for the licence might proceed in the light of this.

49. It would appear to be one of the technical requirements of the Works Bureau that details of the management and technical personnel should be submitted with the application for an LPM licence and all contractors are obliged to keep the Works Bureau informed of any changes of such personnel. If a contractor fails to comply with this, he shall be removed as a licensed contractor or be demoted to a lower group. On the available evidence, it would appear that the management did not inform the Works Bureau of the changes in personnel of the Company whether before or after the said letters of Brian Cheng. There is no information before the court whether any punitive action might be taken against the Company notwithstanding that an LPM licence was issued to the Company on probation in November 2002.

50. Secondly, it was alleged that there were other methods of meeting the requirements of the Works Bureau regarding the minimum employed capital and minimum working capital, other than raising capital through the rights issue. It was alleged that the decision to raise capital by a rights issue was taken in the knowledge that the petitioners had no money to subscribe for the shares allotted and was contrary to the agreement or understanding in 1998 that KHB is to provide the Company with financial support for its projects.

51. Thirdly, it was alleged that if there had been no misrepresentation in the audited accounts, which was devised to depress the value of the shares in the negotiation with KHL Projects, the Works Bureau would not have assessed the shortfall in working capital of the Company at HK$22 million and there would have been no need to rectify any shortfall in working capital.

52. Fourthly, in a letter of Brian Cheng to the Company dated 8 August 2002 protesting against the rights issue, he had proposed to take up the rights issue by setting off the subscription amount against a debt of HK$1.5 million owed from the Company to him and parties associated with him. It was alleged that this proposal was unjustifiably rejected by the Company.

53. The allegations of the petitioners raise factual conflicts to be resolved. On the present application, I ought to assume that the allegations of the petitioners are true. On that basis, I am unable to say that it is plain and obvious the contention of the petitioners that the rights issue was for an ulterior purpose to dilute their shareholdings is bound to fail. I decline to strike out the petition for a winding-up order on this ground.

Whether the petitioners have acted unreasonably in seeking a winding-up order

54. A number of reasons were put forward why it is plain and obvious that the court hearing the petition would not make a winding-up order against the Company and that it is unreasonable for the petitioners to pursue a winding-up in view of the available remedy under section 168A.

55. Firstly, the Company is solvent and profitable, even with the substantial drop in profits in the first seven months in 2002 as shown in the management accounts made up to July 2002 as mentioned earlier. It was submitted that it would be very unlikely for the court to wind up a successful company.

56. Secondly, it was submitted that it would not be in the interest of any member of the Company for a winding-up order to be made in that the Company specialises in providing engineering services and has built up goodwill in the past few years. The goodwill is a valuable intangible asset and it would be lost if the Company is wound up. Further, on the liquidation of the Company, its plant and machinery which have a net book value of HK$2,822,967.00 as at 31 December 2001 would be sold at break- up value and this would be significantly lower than their book value.

57. Besides, the LPM licence recently obtained by the Company would be revoked as it is provided in the Contractor Management Handbook published by the Works Bureau in June 2002 that the Secretary for Works reserves the right to remove any contractor from the specialist list or take other regulating action upon its winding-up (paragraphs 5.1.2 and 5.1.3(vi)) and in normal circumstances, a contractor would be removed from all categories in which it is listed upon the winding-up of its business, according to the guidelines to department heads in making recommendations to the Works Bureau (paragraph 5.2.3). As the holder of an LPM licence, the Company is able to tender for government projects without having to pay an administrative fee of 9 to 25% of the contract value to the main contractor, so the licence is a valuable asset which would be lost if the Company is wound up.

58. Furthermore, according to the General Conditions of Contract for Term Contracts for Civil Engineering Works issued by the Government, which apply to all contracts awarded by the Government, in the event that the contractor should go into liquidation, the Government as the employer may upon giving notice to the contractor enter the site and expel the contractor and employ others to complete the outstanding works (clause 84(1)). Thus, the Company would be unable to complete its on-going projects, the benefit of such contracts would be lost, and the liability to the employer would be increased. All this would reduce the assets of the Company and it would not be in the interest of any of its members.

59. There would also be delay in recovering the accounts receivable from contract customers and debtors if the Company is to be wound up, and delay might jeopardise the recovery of debts. According to the management accounts, as at 31 July 2002, the accounts receivable amounted to HK$30,331,987.00, of which HK$21,873,408.00 was owed by a main contractor and legal proceedings have been commenced against this debtor.

60. Thirdly, it was submitted that innocent shareholders, being Alliance and Leong, holding 37.6% of the shares, would be adversely affected by a winding-up order. However, I doubt if they could be regarded as innocent shareholders, in view of the allegations of forgery and misappropriation of shares made by Brian Cheng.

61. Fourthly, it was submitted that a pending petition for winding-up would be detrimental to the business of the Company. Its dealings with suppliers, sub-contractors, main contractors may be adversely affected. Although no action has been taken by Maybank to terminate the facilities granted to the Company, there is evidence from another bank which has declined to offer any facility to the Company in November 2002 until "satisfactory clearance" of the winding-up petition which has been advertised.

62. Fifthly, in the event that an order is made for the purchase of the shares of the petitioners under section 168A, KHB would have sufficient means to pay for the purchase of these shares at a fair value to be determined. According to the consolidated balance sheet for the year ended 31 December 2001, KHB and its subsidiaries have cash and cash equivalents of RM28,873,785.00, equivalent to about HK$59.8 million. It is not disputed by the petitioners that KHB should have financial means to purchase their shares.

63. Sixthly, KHB and Support Capital have made an open offer on 28 November 2002 to sell to the petitioners (1) 510,000 of their shares (being the total number of shares held by KHB before the rights issue) at HK$12,750,000.00 (which is equivalent to 51% of what the petitioners have alleged to be the "fair value" of the Company, after applying what KHB regarded to be an appropriate discount of 34%); and (2) 1,275,000 of their shares allotted in the rights issue at the subscription price of HK$1,275,000.00. The offer is subject to the term that all outstanding loans of KHB to the Company would be assigned to the petitioners for a consideration equivalent to the amount outstanding. The offer was rejected by the petitioners on 2 December 2002 as a purely tactical move to bolster the striking out application and not a genuine offer. Further, no mention was made in the offer regarding the shares of Brian Cheng that had been misappropriated as alleged by the petitioners. I am not prepared to find on the existing evidence that the petitioners have acted unreasonably in refusing the open offer or that the Company would have sufficient funds to purchase the shares of KHB and Support Capital on the terms of the offer.

64. For the above reasons, it was contended that there would be no real prejudice to the petitioners if they were to be confined to their remedy under section 168A. I was referred to section 180(1A) of Cap. 32 and the decision at first instance of Re Wong To Yick Wood Lock Ointment Ltd [2001] 2 HKC 618 and in the Court of Appeal, CACV No. 867 of 2001, 23 April 2002. It was held that where it is plain and obvious that a winding-up order would not be made but alternative relief under section 168A would be granted, the court would hold the petitioner to have acted unreasonably in insisting on winding up and would strike out the petition to wind up on that basis. In that case, the court came to the view that it would be unlikely in the extreme to wind up the company, which was very successful and profitable and that it would not be in the interests of any of its members to wind up the business as it might result in the sale of assets at break-up value, and without regard to the goodwill and know-how of the company in the manufacture of a unique Chinese medicinal product. The court was satisfied that there was an available remedy to the petitioners under section 168A. Thus, there would only be a real detriment to the company and its neutral shareholders and no proper benefit to the petitioners for them to persist in seeking to wind up the company.

65. It would be seen from the above that much the same arguments were advanced in the present application, although the financial position of the Company may not be as strong as the company in Wong To Yick and the arguments that a winding-up order would be unlikely in the extreme may not apply with the same force. There is also one material difference. In Wong To Yick, it was held that there would be no real prejudice to the petitioners by striking out their claim for a winding-up order, as the petitioners accepted that on their case as disclosed in the petition, there was no ground or basis which would entitle them to a winding-up order only, but not an order under section 168A.

66. This is not the position here. As mentioned earlier, the locus of Brian Cheng in seeking relief under section 168A is challenged as it is disputed that he is a member of the Company. His locus to petition for a winding-up is not challenged, in view of section 179(1). If the allegations of forgery and misappropriation of shares were not established, Brian Cheng would only be entitled to petition to wind up the Company, on the other allegations of dilution of the shareholding of KHL Projects and the misrepresentation in the audited accounts. The relief under section 168A would not be available to him and section 180(1A) would not apply at all. There would be no savings in costs or time if only the winding-up petition of KHL Projects is struck out but not the petition of Brian Cheng, and that is not the relief sought in the present summons. The power to strike out should be exercised with circumspection. I am not persuaded that the petitioners have acted unreasonably in pursuing the remedy to wind up the Company. I decline to exercise my discretion to strike out the relevant paragraphs in the Amended Petition relating to the winding-up relief on this ground.

Orders

67. For the above reasons, I dismiss the application of KHB to strike out various parts of the Amended Petition. I make an order nisi that the petitioners are to have the costs of this application in any event.

68. As for the costs of the application for a validation order before Deputy Judge Barma, SC, which were reserved to me, I make an order nisi that the costs of that application are to be in the cause of the petition.